Election losses by the party of
Japanese Prime Minister Naoto Kan over the weekend may delay a
debate on whether to raise the sales tax to address the nation’s
budget shortfall, according to Dai-Ichi Life Research Institute.

Opposition control of the upper house will likely last
until the DPJ’s leadership election in September, said Hideo Kumano, the Tokyo-based chief economist at the research unit of
Japan’s second-largest insurer. The political turmoil may
“stall a debate on fiscal reform, including raising the sales
tax,” he said.

In the wake of the European debt crisis, Kan was able to
gain voters’ understanding for his call for a debate on whether
to raise the 5 percent tax, Kumano said. Still, “Prime Minister
Kan’s wavering on how to use revenue from the tax invited
voters’ skepticism over his pledge to cut spending,” he said.

The government should raise the levy by 2 percentage points
in fiscal 2015 after the next general election, followed by a 3-
percentage point increase several years later, Kumano said.

Kan, who took office on June 8, released a fiscal plan on
June 22 that said annual spending will be capped at 71 trillion
yen ($797 billion) over the next three years along with a series
of tax reforms. The strategy also calls for balancing the budget
by the year ending March 2021. New bond sales will be kept
within the current period’s 44.3 trillion yen next fiscal year
and beyond, the plan said.